Not verifying information on the tax return against supporting documentation, not advocating for your client, treating sales tax audits like income tax audits are top mistakes made.
If your client receives an audit notice, tax attorney Samuel Brotman shares three very common mistakes that he have seen tax accountants make when representing clients in front of the government.
Not Verifying the Information on the Tax Return against Supporting Documentation
When representing a client in an income tax audit, I would highly suggest that you pre-audit the client based on the information that the revenue agent asks for in the Information Document Request (IDR). For example, if deductions are at issue, you will want to verify the numbers stated on the return against the client’s general ledger, your work papers, and most importantly the client’s bank statements. In order for an expense to be deductible in the year in question, expenses must be both ordinary/necessary AND incurred in the year in question. You would be amazed how many QuickBooks errors that I have seen and how much information does not tie back to the original bank statements. Rather than auditing the whole return, do a small sampling of your major categories to ensure general accuracy and highlight your testing to the auditor in the examination meeting. For income, make sure all deposits can be properly explained and accounted for along with matching the gross income figures listed on the return itself.
Not Advocating for Your Client
IRS demands and deadlines are not set in stone, which could be detrimental to your client. You are not required to agree with the IRS auditor on all timelines and documentation requirements.
Many tax accountants approach an audit from a “compliance” perspective rather than an “advocacy” one. Remember that the goal of an audit is to walk out with as little examination change as possible and to make the process as quick and easy for the client as possible. Remember that the government is not under those same time demands. Often times, IDRs that are issued by auditors are overly broad and you are not required to produce all the documentation requested. Start by asking the auditor to reduce the scope of the audit in the first meeting to the key issues. Knocking out key issues to the satisfaction of the auditor can likely streamline the rest of the audit. If you encounter pushback from the auditor, do not be afraid to get their manager involved or to send the case to IRS Appeals. As long as what you are asking for is reasonable, the IRS will generally work with you to make the process as smooth as possible. Remember that the auditor has a workflow too and is similarly motivated to move things along as expediently as possible.
Treating Sales Tax Audits Like Income Tax Audits
Sales taxes and income taxes are not governed by the same entity. The IRS is in charge of income taxes while the State Board of Equalization is in charge of sales taxes in California. The BOE and the IRS have different spheres of interest and different methods of auditing.
Unlike an IRS audit, a sales tax audit typically encompasses up to four years, and the list of requested documents is enormous. In addition, the BOE may try to set the meeting at the client’s home or place of business rather than the tax office.
Neither of these requests is good for the client. Fulfilling an extensive list of documents places a heavy burden on the client and you. Meeting at the client’s office or home increases the possibility the auditor will find a way to ask for more documents informally. The more information the tax board has, the more it will try to expand the scope of the audit. The auditor may try to use the additional information to trap your client into a position that may or may not be true. In a sales tax audit, although the temptation may be to give the auditor what they ask for, the focus should be on limiting the scope of information and providing as little information as possible.
Set the meeting at the tax board offices and seek to limit the number of documents requested. Your client does not have to provide everything on the list. Remember that controlling the flow of information will minimize the issues that arise during the course of the audit.
As long as governing bodies require taxes, they will perform tax audits. You are often the first and only advocate your client will ask for assistance. Avoid these three mistakes and save your client a heavy time burden and a higher tax bill.
Samuel Brotman is a practicing attorney in San Diego and the founder of Brotman Law. His practice primarily centers on all aspects of tax litigation and criminal/civil tax controversies in front of the Internal Revenue Service, Franchise Tax Board, Employment Development Department, Board of Equalization, and various other state/local tax agencies. To learn more about Sam, visit him at http://www.sambrotman.com/ or follow him Facebook, Twitter, or LinkedIn.